Economic reforms in China

China’s leadership has announced that it will implement economic reforms in an effort to boost growth. Although resistance from vested interests is expected, it is hoped that the reforms succeed so that the world’s No. 2 economic power can serve as a locomotive for global growth.

The Chinese economy saw relatively low growth in the first two quarters of 2013. Its gross domestic product grew 7.7 percent in the January-March period from a year earlier and 7.5 percent in the April-June period. These figures represent a decline in GDP growth for two consecutive quarters. Although the GDP growth in the January-June period was 7.6 percent, slightly topping the government’s annual target of 7.5 percent, the GDP growth has been less than 8 percent for five consecutive quarters.

It has been reported that the percentage of bad loans is increasing in 12 of the 16 Chinese banks that are listed on stock exchanges. China also has the problem of “shadow banks,” which are not registered with any regulatory body and conduct their activities outside of banking regulations.

These banks represent an unhealthy aspect of the Chinese economy. They collect funds by selling high-return financial instruments and then loan the money to real estate companies and local government-affiliated investment companies whose credit worthiness is low. Ignoring the policy of the central government, some local governments borrow high-interest loans from shadow banks and invest in condominium development. These local governments are suffering from large amounts of debt. The central government says it will implement strict controls over them.

Premier Li Keqiang, who assumed his post in March, made it clear that he will pursue economic reform and stable economic growth as pillars of his economic policy. Specifically, he mentioned such measures as reform of the state financing and budget system, leaving interest rates and the currency exchange rate to market forces, pushing income redistribution and strengthening social welfare programs.

On Aug. 22, China’s State Council approved the establishment of a pilot free-trade zone in Shanghai, in which trading of China’s currency and banking interest rates will be liberalized and foreign capital-affiliated companies will reportedly be more free to pursue their commercial activities.

In late July, the Chinese Communist Party’s Politburo resolved to “deepen reform and accelerate structural adjustment” in the last half of 2013. In late August, it decided to hold a plenary meeting of the party’s Central Committee in November to study ways to “thoroughly deepen reform.”

The Chinese economy is suffering from such problems as an unhealthy financial sector, oligopoly by state enterprises and a wide economic gap between the rich and poor. The Chinese leadership should make strenuous efforts to achieve balanced economic growth that can raise the living standards of the hundreds of millions of Chinese who remain mired in poverty. It will also be important to ensure the independence of regulatory authorities and the judiciary so that China’s economic and financial systems will operate in a rational and fair manner based on market principles and rule of law, not by the whims of powerful officials.